Wharton, Thomas W., Docket No. 236

Docket No.: 236

IN THE MATTER OF THOMAS W. WHARTON

Commissioners: Diver, Ch.; Brickman, Burns, McLaughlin, Mulligan

Date: May 8, 1984

DECISION AND ORDER

I. Procedural History

The Petitioner initiated these proceedings on September 30, 1983 by filing an Order to Show Cause pursuant to the Commission's Rules of Practice and Procedure, 930 CMR 1.01(5)(a). The Order alleged that the Respondent, Thomas W. Wharton, a former president of the Community Development Finance Corporation (CDFC), a state agency, violated the conflict of

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interest law (specifically, s.5 of G.L. c. 268A) by receiving compensation from a private company in connection with matters in which he had participated while at CDFC.

The Respondent filed an answer in which he denied "each and every allegation, conclusion and finding in the Order to Show Cause." He also filed three "Motions for Dismissal" which will be discussed below.

The adjudicatory hearing on this matter was held on four separate days (January 26, 1984, January 27, 1984, February 10, 1984, and February 22, 1984), before Commissioner Joseph I. Mulligan, Jr., the Presiding Officer designated pursuant to G.L. c. 268B, s.4(c). The parties thereafter filed briefs with the Commission and presented oral arguments before the full Commission on April 17, 1984. In rendering this Decision and Order, each of the participating Commissioners has heard and/or reviewed the evidence and arguments presented by the parties.

II. Findings of Fact[1]

1. The Community Development Finance Corporation was established by the Legislature pursuant to G.L. c. 40F, s.s.1 et seq. to invest state funds in small businesses within economically depressed areas of the Commonwealth.

2. Wharton was president of CDFC from August, 1980 to June 30, 1982.

3. In May of 1981, Wharton identified Computer Components Systems, Inc. (CCS), a corporation located in Lawrence as a good prospect for involvement by CDFC. CCS was engaged in the fabrication of precision sheet metal components.

4. In October of 1981, CCS submitted a proposal to CDFC seeking to have CDFC invest in it.

5. In his capacity as president of CDFC, Wharton toured CCS and met with its president, Larry Johnston, assigned a CDFC financial analyst to perform a management audit of CCS, submitted to the Board of Directors of CDFC "historical and projected financial information" on CCS, and presented CCS's investment proposal to the Board at its December 17, 1981 meeting.

6. The Board authorized Wharton to make the investment which involved an initial equity investment of $10,000 and subsequent promissory notes aggregating $240,000. The Board further noted that the Investment Agreement to be entered into must "provide for adequate reporting of financial data from [CCS] to [the local community development corporation] and the CDFC, including an annual audit of [CCS's] books."

7. The Investment Agreement was executed on February 4, 1982 with Wharton signing on behalf of CDFC. As part of that Agreement, CCS agreed to furnish CDFC annual financial reports and monthly financial statements which would include a balance sheet and statements of profit and loss. CCS further agreed to furnish CDFC full information pertinent "to any matter in connection with the company's business," and to permit CDFC representatives to visit and inspect any of its properties, including its books and "to discuss its affairs, finances and accounts with its officers."

8. At the end of March, 1982, Wharton tendered his resignation to the CDFC Board, to be effective June 30, 1982.

9. In the early part of 1982, CCS lacked adequate financial management. Neither its president nor vice president possessed the requisite financial skills. This need for strong financial management was of concern to the CDFC Board at the time the investment was approved and continued to be of concern to the CDFC staff after closing.

10. CCS attempted to "solve [its] need for financial planning and control" in various ways, first with the presence of a financial consultant on its Board of Directors, then by hiring outside consultants, and finally by hiring a controller. Thomas Wharton took over as controller, informally on July 23, 1982 and formally on August 5,1982.

11. As of July 15, 1982, the balance of funds available to CCS from CDFC was $85,000. Johnston had requested $50,000 of that. On July 15th, CDFC responded to that request by sending a check for $23,488.85. In a letter accompanying that check, CDFC's investment officer noted that: "To advance monies to you without accurate financial information on a long-term financial program for survival of CCS is to say the least making me feel uncomfortable." Among the items requested by CDFC before the next "drawdown request" were "weekly flash reports," a "revised payout schedule," a "revised break even analysis," and a "demonstrated plan for achieving profitability."

12. A week later, on July 23, Wharton met with CCS's president (Johnston), vice president (Ham) and another employee (Payne). A "survival strategy" was mapped out, the gist of which was to "[t]ake the money, invest it back into raw materials, salaries, production and collection. Sell, produce and collect for a period of 60 to 70 day." Responsibilities were assigned: Johnston and Ham were to be in charge of sales and Payne of production; Wharton was to collect funds, and coor-

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dinate the sales and production areas. The four participants at the July 23rd meeting "set goals in sales, shipping, production and backlogs... [T]hey set up weekly sales and production report [sic] that would.. .give [them] the information" as to whether these goals were being met.

13. Six days later, on July 29, 1982, Johnston responded to the conditions set by CDFC "before any drawdown request [could] be acted upon" and made a new drawdown request. Johnston noted that an "internal weekly report has been designed," and a "revised payout schedule was prepared along with a cash flow schedule," that the "strategy for the next 60 to 90 days [was] basically to conserve all cash and first apply it to raw materials and salary," and that there would be closer coordination between production, sales and finance. Johnston further noted that in order to solve its cash flow problem, CCS needed the cooperation of CDFC, Arlington Trust Company (its major secured creditor) and its other secured and unsecured creditors. CDFC's cooperation was termed "crucial."

14. On August 2,1982, Arlington Trust initiated foreclosure proceedings but agreed to a temporary stay while CCS tried to come up with a plan to avert foreclosure. As consideration for this forbearance, CDFC agreed to advance CCS $5,000 which would be paid to Arlington Trust. (At this time, CDFC advanced CCS a total of $12,000). Arlington Trust also indicated that it would "entertain an offer of approximately $160,000 [from CDFC] to assume [the bank's] present collateral position.

15. Wharton was among those representatives of CCS who met with CDFC's investment officer on August 3 and August 4,1982 to discuss the pending foreclosure by Arlington Trust. Wharton also indicated to CCS's Board of Directors that among other measures that had to be taken, the company needed "the balance of the drawdown from CDFC."

16. On August 5,1982, Wharton was informed by CDFC's counsel that the conflict of interest law would "prevent [him] from working for [CCS] on any matter relating to its Investment Agreement with CDFC." On the same day, Wharton sought an advisory opinion from the Ethics Commission in which he indicated that his role in CCS would not involve "any appearance or direct contact by [him] with CDFC."

17. On August 9, 1982, Johnston reported to CDFC that CCS "ha[d] developed the financial strategy to overcome the serious crisis that it [was then] facing," submitted "supporting documents that detail[ed] that strategy," and requested that CDFC release to CCS $8,000 a week for six week and defer interest payments. Wharton prepared those supporting documents, knowing they would be used to support the drawdown request to CDFC: Wharton had been present at the management meeting on August 4, 1982 at which CDFC's investment officer discussed a "to-do list" for gathering documentation on CCS's financial position for presentation to CDFC's investment committee; Wharton had stressed the need for more money from CDFC; the documents Wharton prepared correlated to that "to-do list;" and their Content was more consistent for submission to CDFC than to Arlington Trust.

18. On August 16,1982, Wharton stated to the chief of the Legal Division of the Ethics Commission that his role at CCS was limited to dealing with banks, that he was not dealing with CDFC, and that he was not performing the functions of controller as set out in his contract.

19. On August 19, 1982, Johnston asked CDFC to obtain from the Ethics Commission a "waiver" to allow Wharton to be CCS's controller.

20. On August 23, 1982, the CCS Board of Directors voted to fire Wharton.

21. On or before August 24, 1982, Wharton prepared for Johnston a status report to be given to CCS's Board of Directors. In that report, it is stated: "Although Computer Component Systems continues to operate according to plan, there still remains a need for the release of [CDFC] funds."

22. On August 25,1982, Wharton resigned from CCS.

23. On August 27, 1982, the chief of the Legal Division of the Ethics Commission orally advised Wharton that the conflict law would prohibit him from becoming involved with CCS in any matters related to the CDFC loan or conditions established under the loan. That oral advice was coded in writing on August 30, 1982.

24. Wharton returned to work at CCS on August 31, 1982, and performed services for the company through September 17, 1982.

25. The Commission rendered its formal advisory opinion to Wharton on September 13, 1982.

26. Wharton again resigned from CCS on September 18, 1982.

27. For the nine-week period from July 16,1982 through September 17, 1982, Wharton performed services for CCS on 44 days and received a total of $14,690 from the company.

28. The preliminary inquiry into Wharton's activities was initiated by the Commission on December 20, 1982. On March 22, 1983, it was extended to June 1,1983 but ended on April 12,1983 when the Commission found reasonable cause to believe that the law had been violated.

Page 185 29. The Order to Show Cause in this case issued on September 30,1983 and a hearing was scheduled for December 14, 1983. Less than two weeks before the hearing, Wharton's attorney withdrew from the case and asked for a two-month continuance. A six-week continuance was granted to January 26, 1984. On January 20, 1984, Wharton sought a further continuance to March 15, 1984; his request was denied. The hearing took place over four days: January 26, 1984, January 27, 1984, February 10, 1984 and February 22, 1984.

III. Decision

A. Motions to Dismiss

Wharton first argues that the proceedings against him should be dismissed because he was denied a continuance and thereby denied an adequate opportunity to prepare his defense. Four months elapsed in this case between the issuance of the Order to Show Cause and the hearing. For approximately the first half of that period, Wharton was represented by counsel. When counsel withdrew from the case, Wharton was given an additional six weeks to prepare his defense. In addition, the two weeks between the second and third hearing days and the twelve days between the third and fourth hearing days were available to him. Thus, there was an adequate opportunity for Wharton to prepare his defense. Accordingly, this Motion to Dismiss is denied.

Wharton next argues that the proceedings should be dismissed because the informal advice he received from the chief of the Commission's Legal Division was "radically different" than that contained in his advisory opinion and that the chief of the Legal Division had no authority to give informal advice. The informal advice Wharton received was consistent with the advisory opinion ultimately rendered by the Commission. While such informal advice is not binding on the Commission and does not have the legal effect of an advisory opinion (see, G.L. c. 268B, s.3(g)), it is permitted, and, indeed, often contributes to the efficient administration of the Commission's statutory responsibilities. Accordingly, this Motion to Dismiss is denied.

Finally, Wharton argues that these proceedings should be diimissed because of the length of the preliminary inquiry and the delay in issuing an Order to Show Cause after reasonable cause was found. The Commission's procedures provide a 90-day limit on the length of an inquiry unless the Commission votes to extend the inquiry. While the inquiry in this case took more than 90 days, it was extended by the Commission. It is of no consequence, absent a showing of prejudice, that the extension was granted after the 90- day period (here, by one day since the 90th day fell on a Sunday).[2]

The 90-day rule is not based on any statute, but reflects the Commission's desire that inquiries be conducted as expeditiously as possible. Its principal purpose is to make the Commission aware of the length of inquiries and to require its acquiescence for them to go beyond 90 days. That purpose is satisfied whether the extension is granted before or after the initial 90-day period ends. With respect to the time period after the finding of reasonable cause, it should be noted that neither the provisions of c. 268B dealing with investigations (see s.4) nor the Commission's procedures impose any requirement as to when the Order to Show Cause must issue. Here again, there is no showing that Mr. Wharton was prejudiced or that the Petitioner gained any undue advantage by the delay. Indeed, during the argument, Wharton indicated that during this period his lawyer was negotiating with the Petitioner over resolution of the case by way of a Disposition Agreement. Accordingly, this Motion to Dismiss is denied.

B. G.L. c. 268A, s.5

Section 5 of G.L. c. 268A prohibits, in part, a former state employee from receiving compensation from a private party in connection with any particular matter in which the state is a party or has a direct and substantial interest and in which the former employee had participated while with the state. An "application," "submission, contract," "decision," and "determination" are all among the items included in the definition of "particular matter." See G.L. c. 268A, s.1(k).

Section 5 is grounded on several policy considerations. The undivided loyalty due from a state employee while serving is deemed to continue with respect to some matters after he leaves state service. Moreover, s.5 precludes a state employee from making official judgements with an eye, wittingly or unwittingly, consciously or subconsciously, toward his own personal future interest. Finally, the law ensures that former employees do not use their past friendships and associations within government or use confidential information obtained while serving the government to derive unfair advantage for themselves or others.

Applying the law to this case, CDFC is a state agency. It was created by the legislature as a "public instrumentality" and placed in the state's Department of Community Affairs. See G.L. c. 40F, s.2. Its available funds are derived from the state Treasury. See G.L. c. 40F, s.4. Wharton, thus, is a former state employee by virtue of his prior employment as CDFC's president. See

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G.L. c. 40F, s.3(j). After he left state service, Wharton was compensated by CCS, i.e., someone other than the Commonwealth of Massachusetts. The Investment Agreement entered into between CDFC and CCS was a contract and thus a particular matter as that term is defined in G.L. c. 268A, s.1(k) and used in s.5. The state was a party to and had a direct and substantial interest in that matter. See, EC-COI-79-122; 82-79; 82-130. The questions left to be resolved are:

1. whether Wharton had participated in the Investment Agreement while a state employee, and

2. whether his subsequent work for CCS for which he was compensated was in connection with that Agreement. Clearly, Wharton participated in the Investment Agreement as a state employee. Among other things he identified CCS as a good prospect for investment by CDFC; he submitted background information on CCS to the CDFC Board; he presented CCS's proposal to the Board; he was the one authorized to make the investment; and he signed the Investment Agreement on behalf of CDFC. Such actions constituted personal and substantial participation in that agreement as required by the conflict law. See G.L. c. 268A, s.1(j); see also EC-COI-82-156; 82-143; 81-58.

In view of the concern expressed by CDFC over the financial management of CCS and the importance of CDFC funds to CCS, arguably, everything Wharton did to help solve the company's troubled financial situation was in connection with the Agreement with CDFC. The Commission need not decide that issue, however, since Wharton's activities at CCS directly related to the Investment Agreement in the following three instances:

(1) The Agreement clearly contemplated a close monitoring by CDFC of CCS's financial affairs. As part of that monitoring, CDFC's investment officer expressed concern over the need for accurate information as to how CCS planned to survive financially and required various items from CCS before any further money could be advanced Wharton was directly involved in planning such a survival strategy and helping the company respond to CDFC's request. (Findings of Fact Nos. 11-13). (2) When Arlington Trust threatened to foreclose, CDFC's cooperation became critical to CCS. The company requested that CDFC release to it under the Investment Agreement $8,000 a week for six weeks and agree to defer interest payments. Wharton prepared the documents to support that request. (Findings of Fact Nos. 14-17). (3) Finally, Wharton prepared a status report to the CCS Board of Directors which directly related to the further release of CDFC funds under the Investment Agreement. (Findings of Fact No. 21).

By the activities listed above, Wharton violated s.5(a) of G.L. c. 268A. It is immaterial whether Wharton did a good job or a bad job for CCS, or whether the company would or would not be able to survive without his services. Section 5 establishes one standard for all former state employees. It could not be fairly applied if in each instance the quality of the necessity of the work performed had to be analyzed. Moreover, such an analysis would be irrelevant to the purposes underlying the rule.

IV. Order

On the basis of the foregoing, we conclude that Thomas W. Wharton violated G.L. c. 268A, s.5(a). Pursuant to authority under G.L. c. 268B, s.4(d), we hereby order Mr. Wharton to pay a civil penalty of $1,000 (one thousand dollars).[3] We order Mr. Wharton to pay this penalty to the Commission within 30 (thirty) days of receipt of this Decision and Order.

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[1] Included are those findings relevant to the Motions for Dismissal,

[2] The inquiry ends with the Commission's finding of reasonable cause.

[3] While in some circumstances, the fact that a person sought an advisory opinion might be considered a factor in mitigation of a violation, we decline to do so here. Wharton appears to have sought an opinion only after being forced to do so by CDFC counsel. Moreover, in his opinion request and discussions with Commission staff, he inaccurately described his role at CCS.